Etsy (NASDAQ:ETSY) is getting ready to flex its pricing elasticity, and Wall Street's loving it. Shares of the arts and crafts marketplace operator soared 27.9% last week after the company announced it was increasing its seller fees. It's also boosting its guidance as a result of the new pricing that will go into effect next month.

The dot-com darling, which has seen its stock roughly triple over the past year, unveiled a pair of premium-priced subscription models that it will begin to roll out next month. However, the real game changer is that it's lifting the percentage that it charges as a transaction fee from 3.5% to 5%. The higher fee will also now apply to shipping fees tacked on by the sellers to cover fulfillment costs. It may not seem like much, but we're talking about a 43% increase on the fee it charges for sales taking place on its site. If the entrepreneurial artisans that pitch a virtual tent on Etsy accept the change, it will dramatically increase Etsy's business.

Etsy headquarters in New York.

Image source: Etsy.

The art of guidance

Etsy's take is naturally going to surge once the new transaction fee kicks in on July 16, and the marketplace operator is boosting its outlook accordingly. It sees revenue rising 32% to 34% for all of 2018, up from the 22% to 24% increase it was targeting last month. It's revising its projection for gross merchandise sales growth from between 16% and 18% to between 16% and 19%, and it makes sense for that metric to hold relatively steady since transaction fees don't factor into that line item. It also sees adjusted EBITDA margin holding steady at 21% to 23% -- as it expects to reinvest a good chunk of the incremental proceeds into improving its seller tools and increasing the direct marketing budget -- but that also means that adjusted EBITDA will follow the revised revenue higher.  

It also bears pointing out that this is a full-year revision to Etsy's top-line guidance for an event that will take place just past the midpoint of 2018. Growth should be explosive for the latter half of this year, and that's should be reflected in the updated guidance when Etsy reports again in early August. 

Analysts are naturally giddy about the move. At least four Wall Street pros are jacking up their price targets: RBC Capital, D.A. Davidson, Roth Capital, and KeyBanc are all lifting their price goals for the sizzling stock. They are encouraged to see Etsy come through with its first fee increase in 13 years, a move that telegraphs confidence in its ability to compete against rival online platforms. Beyond the revised guidance, analysts also feel that the enhanced seller tools and the Etsy Plus subscription plan that will roll out next month, and the Etsy Premium offering that will target its largest sellers next year could boost gross merchandise sales in the years to come.  

Etsy was already on a roll before the new subscription plans and its transaction fee increase. Revenue growth has accelerated for four consecutive quarters, and if it can stretch that streak through the current quarter, it will be a breeze to extend that run to seven quarters with what should be explosive top-line growth in the second half of this year once the new fees kick in. The key, naturally, is getting sellers to accept the increase. They're not happy, as you can imagine. They will be getting a thinner slice of the pie, and that may prompt some to consider other marketplaces. This could also open the door for a rival or potential rival to come in with an aggressive seller acquisition strategy to hit while the merchants are vulnerable. There's rarely such a thing as a smooth rate increase, but if Etsy is able to hold on to most of its sellers, beefs up its marketing efforts, and continues to invest in seller tools to make Etsy storefronts stand out, it's hard to bet against one of the market's hottest stocks over the past year. 

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool recommends Etsy. The Motley Fool has a disclosure policy.